Stock Plans in India

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Stock options: No tax on grant. Difference between fair market value of the underlying shares at the date of exercise and the exercise price is taxable upon exercise as ‘salary’ income taxable at progressive tax rates. Unless shares are listed on a recognized stock exchange, the fair market value must be determined by a registered merchant banker. US exchanges are not considered to be recognized stock exchanges.

Restricted stock: Taxable upon transfer of shares following vesting. Fair market value must be determined by a registered merchant banker.   

Restricted stock units (RSUs): Taxable upon transfer of shares following vesting for stock-settled awards and upon payment of cash for cash-settled awards. Fair market value must be determined by a registered merchant banker.

Performance stock: Taxable upon vesting. Fair market value must be determined by a registered merchant banker.

Upon the sale of shares received at exercise or vesting, an employee will be subject to capital gains tax on the difference between the sale price for the shares and the fair market value on the date of exercise. Gain will be taxed as long-term or short-term capital gains depending on the length of the holding period and whether the company’s shares are listed on a recognized stock exchange in India.

Bonus stock: Taxable upon receipt as regular salary income. Perquisite will be taxable when the shares are allotted or transferred to the employee, and the fair market value must be determined by the registered merchant banker.

Stock purchase plans: Discount is taxable on receipt as regular salary income. Perquisite will be taxable when the shares are allotted or transferred to the employee, and the fair market value must be determined by the registered merchant banker.

Retirement savings plans: Employer contributions are treated as current taxable income, assuming the employee’s rights are vested.

For eligible start-up companies, taxation of stock-based benefits may be deferred beyond exercise or vesting, as applicable, until the earliest of an employee’s termination of employment, the date on which the underlying shares are sold, and the four-year anniversary of the date of exercise or vesting, as applicable.     

TAX WITHHOLDING

Tax withholding is required. Amounts withheld must be remitted to tax authorities no later than seven working days after the month in which the taxable event occurs.

Generally, no tax deductions or tax benefits are available to the Subsidiary for providing stock plan benefits of the Parent to its employees. However, if the Subsidiary reimburses the Parent for the actual costs, it may be entitled to a tax deduction subject to compliance with tax withholding provisions on such cost recharge. It is unsettled law as to whether such deduction applies where the Parent provides newly issued shares to the employees.

Effective October 1, 2023, tax collected at source, which occurs when remittances are made, will increase from 5% to 20% on the remittance of currency outside India under the liberalized remittance schemes if the amount exceeds INR 700,000 (approx. US$9,000).

TAX REPORTING

Tax reporting is required by the Indian Subsidiary on quarterly withholding tax returns that are due by the 31st day following the last day of the relevant quarter (except in the case of the quarter ending March 31, in which case the quarterly withholding tax return can be filed by May 31).

SOCIAL SECURITY TAXES

Employers must contribute to the Employee State Insurance Fund and the Provident Fund, but only for wages payable in cash.

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An offer to more than 50 persons (or more than 200 persons in aggregate in any financial year) by an Indian company may be considered an offer to the public, requiring registration and prospectus disclosure. However, the given thresholds do not apply to stock-based benefits offered by an Indian company to its employees or the employees of its subsidiaries.

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For cross-border transactions involving securities of Indian or foreign companies, depending on the nature of the transaction, RBI (Reserve Bank of India) approval or reporting is required.

However, employees and directors of an Indian Subsidiary of a foreign Parent Company may acquire foreign securities under a stock benefit plan without RBI approval if the conditions of the exemption introduced in August 2022 that replaced the former general permission exemption are met. Compliance with the new exemption may require the Indian Subsidiary to undertake semi-annual reporting on Form OPI with the RBI through an authorized dealer bank.

Further, the amendment by way of the Foreign Exchange Management (Overseas Investment) Rules, 2022 provides that the foreign securities acquired by employees and directors of an Indian Subsidiary of a foreign Parent Company will count towards such individual’s liberalized remittance scheme limit of US$250,000

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The Equal Remuneration Act 1976 requires equal pay, in cash or in kind, to both sexes for the same work or work of a similar nature. Employees classified as workmen are also subject to certain welfare laws and any collective bargaining agreement that applies. The term generally excludes supervising or managerial employees.

No law prevents the employer from withdrawing stock-based benefits at its discretion. However, if the Parent Stock is listed on a recognized stock exchange in India, guidelines issued by SEBI (Securities & Exchange Board of India) apply, according to which an employer is precluded from amending a stock benefit plan in a manner that is disadvantageous to the employee.

Termination benefits are payable only to workmen. It is uncertain whether stock-based benefits would be included in these calculations.

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Nominal stamp duty applies if any document that evidences the acquisition of stock either is executed in India or is received in India and requires the consideration to be paid there.

The Companies Act generally restricts the amount of financial assistance to an employee for the purchase of company stock to six months’ salary.

Guidelines issued by SEBI (Securities & Exchange Board of India) and other regulatory bodies can apply to various stock-based arrangements.

Indian employers may be required to submit a Form Annual Performance Review (APR) through an authorized dealer bank by December 31 of each year during which shares are issued to its employees by a foreign entity (or by December 31 of the following year, if the accounting year of such foreign entity ends on December 31). Any shares repurchased from employees must also be reported.